All About Estates

Valuation of Interests in Discretionary trusts and Family Law

These days, it is quite common to find intergenerational wealth transfer to consist of property held in a discretionary family trust whose beneficiaries may or may not have been in marital relationships at the time of the time the trusts were created. A siginifcant number of legal and financials issues related to these trusts in family law, including the determination of what is considered “included” and “excluded” family property before marriage and in the unfortunate circumstance of marriage breakdown.

In this regard, the law around governing these issues can be confusing and difficult to interpret depending on the actual circumstances and where you live. I am reminded of a recent article in the press, in which where a noted family lawyer commented that “family lawyers with clients who are discretionary beneficiaries continue to be unable to give clear advice about their clients’ obligations on separation”

A recently reported case in the British Supreme Court highlight but some of the issues encountered

In Cottrell V Cottrell, 2022 BCSC 1607 involving P & J, one of the matters at trial was how to address the future monetary impact of two discretionary trusts that had been set up by J’s parents. P argued that the disputed property and related support issues should be decided on the basis that J would eventually receive a considerable sum of money through the trusts. J argued that this possibility ought not to be considered given the uncertainty surrounding the timing and value of the benefits J may receive from the trust in the future.

Under the Family Law Act in British Columbia (“FLA BC” ) a spouse beneficial interest in property held in a discreet discretionary trust is “excluded” family property. However, if there has been an increase value of the “excluded” family property during the spouse’s relationship, that appreciation is family property. The Court determined such circumstances existed in this matter.

The Court highlighted that these provisions do not state that an increase in the value of the actual property held in a discretionary is family property – an important distinction that must be considered. Accordingly, the fundamental question is whether J’s beneficial interest in the discretionary trusts has increased in value since J acquired an interest in them and that P bore the burden of establishing that there had been such an increase in value.

The Court was not satisfied that P had met this burden. The uncertain nature of J’s contingent beneficial interests in the trust is such that it cannot be said at the time of trial there has been an increase in value of this interest. This uncertainty stems from the fact that J never had the actual, or even apparent, ability to compel a distribution of the trusts and has no reliable assurance regarding the specific extent to which J may receive such a distribution in the future. Therefore, the Court could not find that J’s beneficial interests in the property held is greater now then when the trust were settled.

The Court was careful to state that its determination that P had not established an increase in the value of J’s beneficial interests in the trusts should not be taken as a conclusion of law that is impossible to make a family property claim in respect of a spouse’s beneficial interest in a discretionary trust under the FLA BC. A different conclusion could be reached in another case involving trusts, beneficiaries, and spouses.

This case and others, combined with my experience (limited as it is) with these matters reminds me of some words of sage advice written by a fellow blogger, Darren Lund many moons ago:

“At the end of the day, if a family trust has been established for the purpose of managing and preserving family wealth across generations, the creation of the trust is not the end of the story. To avoid frustrating, or at least complicating, that purpose, once unmarried beneficiaries start to form relationships and marriage becomes a possibility, it is prudent to discuss the idea of using a marriage contract to exclude the trust interest from equalization”

Happy New Year and happy reading!

About Steven Frye
Baker Tilly WM LLP is a leading, independent audit, tax, and business advisory firm based in Vancouver and Toronto, serving clients across Canada. Drawing on well-trained teams across a variety of disciplines, we ensure the alignment of our professional’s skills and experience with client requirements, resulting in exceptional service and business outcomes.


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